Home » Posts tagged 'bond' (Page 4)
Tag Archives: bond
Fed Vice Chair Explains Why The Fed Is Still Obsessing With Negative Interest Rates
Fed Vice Chair Explains Why The Fed Is Still Obsessing With Negative Interest Rates
Two months ago, and roughly 6 weeks before the Fed’s first rate hike in 9 years, Janet Yellen warned that if the “outlook worsened, the fed might weight negative rates” adding that “negative rates could help encourage banks to lend.”
Moments ago, in a speech titled “Monetary Policy, Financial Stability, and the Zero Lower Bound” delivered before the American Economic Association in San Francisco, the Fed’s second in command, Vice Chairman Stanley Fischer while discussing the equilibrium real interest rate, or r* (or the real interest rate at which the economy would settle at full employment and with inflation at 2 percent, provided the economy is not at the ZLB), unexpectedly hinted once again at the potential advent of negative rates in the US, two weeks after the Fed’s raised the interest rate to a 25-50 bps corridor except of course for December 31 when as we noted, the Fed Funds dropped to 0.12%, suggesting that banks are perfectly ok with hiking rates… except when it comes to quarter and year-end window dressing for regulatory, compliance and public filing purposes.
Specifically, Fischer discussed what steps, if any, can be taken to mitigate the constraints associated with the ZLB? His second answer: NIRP. To wit:
Another possible step would be to reduce short-term interest rates below zero if needed to provide additional accommodation. Our colleagues in Europe are busy rewriting economics textbooks on this topic as we speak-and also helping us to remember earlier discussions of negative interest rates by Keynes, Irving Fisher, Hicks, and Gesell.
…click on the above link to read the rest of the article…
The Incredible Shrinking Benefits Of Massive Japanese Money Printing
The Incredible Shrinking Benefits Of Massive Japanese Money Printing
Excerpted from JPMorgan CIO Michael Cembalest 2016 Outlook,
Something is wrong with this picture. In the US and Japan, corporate profits sank during the global financial crisis. In the US, the profit recovery was accompanied by a recovery in household income. In Japan, however, corporate profits and household income moved in opposite directions, as dynamics that helped profits recover did not help consumers.
How can we explain the outcome in Japan? The benefits of a weak Yen are mostly concentrated among large corporations, given translation gains on offshore non-Yen income relative to Yen-denominated costs. For smaller companies and households, a weaker Yen simply resulted in imported inflation. While consumer spending has stabilized after a decline caused by the imposition of a Value Added Tax in 2014, there are few signs of a rebound to pre-VAT levels. Japanese GDP growth has been volatile and averaged 1.5% in 2015; we’re expecting a similar outcome in 2016.
In October 2015, the Bank of Japan did not take further steps which markets were anticipating (e.g., an increase in equity ETF purchases from ¥3tn per year, an increase in REIT purchases from ¥90bn per year or an increase in government bond purchases from ¥80tn per year). Perhaps concerns about the negative domestic impacts from a weaker Yen are affecting BoJ policy.
Our contacts in Japan believe that the BoJ is no longer being pre-emptive, and will wait until November 2016 to act.
The Japanese experiment.
There are few precedents for the kind of experiment Japan is conducting. At the current pace of BoJ purchases, private sector banks might actually run out of JGBs by the end of 2016, at which point the BoJ would have to buy them directly from the non-bank private sector; I think it’s fair to say that no one really knows what would happen then.
…click on the above link to read the rest of the article…
The Mystery Of Dubai’s Vaporized Gold: The Plot Thickens
The Mystery Of Dubai’s Vaporized Gold: The Plot Thickens
Earlier this week, we told a fascinating story about an unprecedented, multi-year smuggling ring involving Turkey, Iran, and Dubai (as well as China, Russia and countless other nations) which saw corruption reaching to the very top of the political and financial establishment: from president Erdogan in Turkey, to one of Turkey’s richest people, Iran-born Riza Sarraf, to Sheikh Sultan Bin Khalifa Al Nahyan, the son of the ruler of Abu Dhabi and one of the world’s richest people. The smuggled object in question was gold, billions of dollars worth of gold.
The focus of the story was the previously unknown Dubai gold trading house, Gold.AE, until recently managed by one Mohammed Abu-Alhaj, which as we showed was the primary conduit by which Turkish physical gold found its way “legally” in Dubai, from where it subsequently left for Iran but not before pocketing millions in “commissions.”
As we reported, Gold.AE – a subsidiary of Gold Holding, the largest gold-focused investment holding company headquartered in Dubai – and the company perhaps best known for launching gold ATMs in the Emirates back in 2010…
… announced a few days ago that it had suddenly and unexpectedly gone out of business, after an inquiry by minority shareholders announced that the entire old “management team abruptly resigned with no notice” and that “there had been substantial withdrawals from the company’s account to the personal accounts of some of the management and the majority shareholders.”
In other words, the company which was used as a cover for billions in gold transactions over the last several years in the Turkey-Iran gold smuggling trade, was suddenly not only insolvent but had been thoroughly plundered of all its holdings, including a thorough plundering of client accounts.
Think the Corzining of MF Global, only on steroids, goes to Dubai.
…click on the above link to read the rest of the article…
Chinese State Firms’ Debt Hits New All Time High, As Profits Tumble
Chinese State Firms’ Debt Hits New All Time High, As Profits Tumble
State-backed financial companies, which in China is redundant as all financial companies are state-backed, were responsible for roughly a third of the cumulative profit decline: excluding financial firms, combined revenues of state-owned firms fell 6.1% in the first 11 months from a year earlier to 40.7 trillion yuan, the ministry said.
According to Reuters, companies in transportation, chemical and power sectors reported a rise in profit in the January-November period, while firms in oil, petrochemicals and building materials – or a vast majority of them – saw a drop in earnings. Firms in steel, coal and non-ferrous metal sectors continued to suffer losses.
“The downward pressure on economic operations remains relatively big, although there are signs of warming up in some indicators,” the ministry said.
This optimism is, however, entirely baseless and we are confident that Chinese corporate profitability is set to go from bad to even worse. The reason for that is that at current commodity prices and production, virtually all of China’s steel industry is loss-making, while over half of commodity companies with debt do not have the funds to make even one coupon payment.
While the logical response to plunging profits would be for the government to enforce a strict discipline for excess capacity reduction, Beijing has been unwilling to do this, afraid of the outcome from the resulting surge in corporate defaults.
…click on the above link to read the rest of the article…
Ukraine “Crooks” Default On $3 Billion Bond To Putin
Ukraine “Crooks” Default On $3 Billion Bond To Putin
Back in August, Ukraine struck a restructuring agreement on some $18 billion in Eurobonds with a group of creditors headed by Franklin Templeton.
Under the terms of the deal, Kiev should save around $4 billion once everything is said and done. That was the good news. The bad news was that Ukraine still owed $3 billion to Vladimir Putin. Here’s what we said at the time:
“..owing Vladimir Putin $3 billion is not a situation one ever wants to find themselves in, but this particular case is exacerbated by the fact that Putin did not loan the money to Ukraine as we know it now, he loaned the money to a Ukraine that was governed by Russian-backed Viktor Yanukovych. Of course Yanukovych was run out of the country last year following a wave of protests (recall John McCain’s infamous speech at Maidan).”
Ukrainian finance minister Natalie Jaresko offered the same restructuring terms to Russia that it offered to Franklin Templeton and T. Rowe. In effect, Jaresko was attempting to tell Vladimir Putin that Ukraine would allow him to take a 20% upfront loss on the $3 billion he loaned to Yanukovych who was overthrown by the current Ukrainian government with whom Moscow is effectively at war.
As you might imagine, Putin was not at all interested. Last month, Moscow “generously” offered to accept $1 billion per year from now until 2018 (so, a “restructuring” at par). Kiev refused, noting that such a deal would violate the country’s agreement with its other creditors.
Earlier this week, the IMF ruled that the debt to Russia was intergovernmental (as opposed to private). “In the case of the Eurobond, the Russian authorities have represented that this claim is official. The information available regarding the history of the claim supports this representation,” the Fund said, in a statement.
…click on the above link to read the rest of the article…
This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession
This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession
But while we disagreed with BofA’s countdown timing, we agreed with something its strategist Michael Hartnett said, namely that “gradual or otherwise, the first interest rate hike by the Fed since June 2006 marks a major inflection point for financial markets.”
BofA then laid out several key factors why “this time is indeed different” when evaluating the global economy’s receptiveness to a rate hike:
- Central banks now own over $22 trillion of financial assets, a figure that exceeds the annual GDP of US & Japan
- Central banks have cut interest rates more than 600 times since Lehman, a rate cut once every three 3 trading days
- Central bank financial repression created over $6 trillion of negatively-yielding global government bonds
- 45% of all government bonds in the world currently yield <1% (that’s $17.4 trillion of bond issues outstanding)
- US corporate high grade bond issuance as a % of GDP has doubled to almost 30% since the introduction of ZIRP
- US small cap 5-year rolling returns hit 30-year highs (28%) in recent quarters
- The US equity bull market is now in the 3rd longest ever
- 83% of global equity markets are currently supported by zero rate policies
However, to the Fed none of these matter: only the price action of the S&P500 does, which as everyone knows, is trading just shy of its all time highs so “all must be well.”
…click on the above link to read the rest of the article…
Venezuela Default Countdown Begins: After Selling Billions In Gold, Caracas Raids $467 Million In IMF Reserves
Venezuela Default Countdown Begins: After Selling Billions In Gold, Caracas Raids $467 Million In IMF Reserves
In late October, when describing Venezuela’s desperate steps to keep itself afloat for a few more months, we reported that in order to fund $3.5 billion bond payments in early November, Maduro’s government had engaged in something that is the very definition of insanity: selling the country’s sovereign (and pateiently repatriated by his deceased predecessor) gold to repay creditors.
Specifically, in the past several months, Caracas has quietly parted with 19% of its gold holdings: “Central bank financial statements posted this week on its website show monetary gold totaled 91.41 billion bolivars in January and 74.14 billion bolivars in May. At the strongest official exchange rate of 6.3 bolivars per U.S. dollar, which the bank uses for its financial statements, that decline would be equivalent to $2.74 billion.”
But while ridiculous, Venezuela’s decision to liquidate some of its gold is perhaps understandable under the circumstances: Venezulea relies on crude oil for 95% of its export revenue, and with prices refusing to rebound, the only question is when do all those CDS which price in a Venezuela default finally get paid.
What is even more understandable is what Venezuela should have done in the first place before dumping a fifth of its gold, but got to do eventually, namely raiding all of the IMF capital held under its name in a special SDR reserve account.
Recall that this is precisely what Greece did in July when everyone was speculating when it would default. Now its Venezuela’s turn.
The details: Reuters reports that Venezuela withdrew some $467 million from an IMF holding account in October, according to information posted on the fund’s web-site, as the OPEC nation seeks to improve the liquidity of its reserves amid low oil prices and a severe recession.
…click on the above link to read the rest of the article…
Forget China: This Extremely “Developed” Country Just Suffered Its Biggest Money Outflow Ever
Forget China: This Extremely “Developed” Country Just Suffered Its Biggest Money Outflow Ever
While understandably all eyes have been fixed on every monthly capital outflow update from China (even the ones that the Politburo is clearly massaging), few have noticed that one of the biggest total outflows currently in the global developed economy is taking place right in America’s own back yard.
According to BofA’s Kamal Sharma, Canada’s basic balance – a combination of the capital and the current account: a measure of national accounts that spans everything from trade to financial-market flows – swung from a surplus of 4.2% of GDP to a deficit of 7.9% in the 12 months ending in June. That’s the fastest one-year deterioration among 10 major developed nations.
Citing Sharma’s data Bloomberg writes that “money is flooding out of Canada at the fastest pace in the developed world as the nation’s decade-long oil boom comes to an end and little else looks ready to take the industry’s place as an economic driver.” In fact, based on the chart below, the outflow is the fastest on record.
“This is Canadian investors that are pushing money abroad,” said Alvise Marino, a foreign-exchange strategist at Credit Suisse Group AG in New York. “The policy in Canada the last 10 years has greatly favored investments in energy. Now the drop in oil prices made all that investment unprofitable.”
The reasons for the accelerating otflows are familiar, or mostly one reason: the collapse in crude oil, among the nation’s biggest exports, has dropped to half of its 2014 peak. “The slump has derailed projects this year in Canada’s oil sands – one of the world’s most expensive crude-producing regions. Royal Dutch Shell Plc’s decision to put its Carmon Creek drilling project on ice last week lengthened that list to 18, according to ARC Financial Corp.”
Worse, there does not appear to be any improvement, despite the recent stabilization in Brent prices:
Sweden Launches MOAR QE, As Krugman Paradise Quadruples Down After Dovish Draghi
Sweden Launches MOAR QE, As Krugman Paradise Quadruples Down After Dovish Draghi
Over the last six months, we’ve documented Sweden’s descent into the Keynesian Twilight Zone in great detail.
Once upon a time, the Riksbank actually tried to raise rates, only to be lambasted by a furious Paul Krugman who accused the central bank of unnecessarily transforming Sweden from “recovery rockstar” to deflationary deathtrap. Tragically, the Riksbank listened to Krugman and reversed course in 2011. Before you knew it, rates had plunged 35 basis points into NIRP-dom. Unemployment subsequently fell, but the promised lift in inflation didn’t quite pan out. Sweden did, however, get a massive housing bubble for their trouble:
Obviously, those charts beg the question of why in the world Sweden (or Denmark, or Norway for that matter… or hell, even the US) are trying to contend that there’s no inflationary impulse, but let’s leave that for another day.
As for the Riksbank’s QE program, things began to go awry during the summer when the central bank managed to buy such a large percentage of the stock of government bonds that market depth was affected, causing investors to reconsider the trade off between liquidity and the benefits of frontrunning central bank asset purchases. In short, government bond yields began to rise in what perhaps marked the first instance of QE actually breaking.
But that didn’t stop the Riksbank from doubling down and increasing their asset purchases just a week later.
Since then, it’s been touch and go, with Stefan Ingves looking warily south towards Frankfurt hoping Mario Draghi doesn’t do something that sends the krona soaring on the way to ushering in a deflationary impulse.
Well, that’s exactly what Draghi did last week when the ECB telegraphed either a further depo rate cut, an expansion of PSPP, or both in December. That pretty much sealed the deal for the Riksbank – either cut, expand QE, or concede defeat in the global currency wars.
…click on the above link to read the rest of the article…
Treasury Warns Of “Humanitarian Crisis” In Puerto Rico If Congress Does Not Agree To Bailout
Treasury Warns Of “Humanitarian Crisis” In Puerto Rico If Congress Does Not Agree To Bailout
“Puerto Rico is not Greece“… but it increasingly looks like it will be in a few weeks, thanks to US taxpayers who are about to foot the bill for yet another creditor bailout.
As we reported last night, creditors of the insolvent commonwealth, hoping to get a bailout and the highest possible return on their bond investment courtesy of the US taxpayer, have been pushing to portray the fiscal situation in Puerto Rico as beyond repair, hoping to force the administration and Congress to act. As The NY Times reported, on Wednesday, Puerto Rico took the unusual step of announcing that talks over restructuring about $750 million of the island’s debt had broken off, a move that some creditors saw as posturing to Washington for help.
Then, all day today, Puerto Rico’s leadership, realizing its interests are suddenly alligned with those of its creditors as a bailout is in everyone’s best interest, took the rhetoric up a notch when the island’s Governor Alejandro Garcia Padilla said in written testimony for Senate Energy Committee that Puerto Rico will have negative cash balance of $29.8 million in November 2015, and then added that the Puerto Rico Government Development Bank may be unable to make its $355 million debt service. “These GDB bonds are supported by a guarantee from the Commonwealth, and the GDB, which faces its own liquidity crisis, is not expected to be able to make the payment on its own based on current information.”
Others quickly chimed in: Puerto Rico Senate President Eduardo Bhatia said he would be in favor of “including everything” in a broad, comprehensive restructuring of the debt.
In short: bail us out now or face the consequences of a domino effect of defaults which puts not only the creditors, but the island itself, in dire straits.
…click on the above link to read the rest of the article…
The World Hits Its Credit Limit, And The Debt Market Is Starting To Realize That
The World Hits Its Credit Limit, And The Debt Market Is Starting To Realize That
One month ago, when looking at the dramatic change in the market landscape when the first cracks in the central planning facade became evident and it appeared that central banks are in the process of rapidly losing credibility, and the faith of an entire generation of traders whose only trading strategy is to “BTFD”, we presented a critical report by Citigroup’s Matt King, who asked “has the world reached its credit limit” summarized the two biggest financial issues facing the world at this stage.
The first is that even as central banks have continued pumping record amount of liquidity in the market, the market’s response has been increasingly shaky (in no small part due to the surge in the dollar and the resulting Emerging Market debt crisis), and in the case of Junk bonds, a downright disaster. As King summarized it “models linking QE to markets seem to have broken down.”
Needless to say this was bad news for everyone hoping that just a little more QE is all that is needed to return to all time S&P500 highs. And while this concern has faded somewhat in the past few weeks as the most violent short squeeze in history has lifted the market almost back to record highs even as Q3 earnings season is turning out just as bad, if not worse, as most had predicted, nothing has fundamentally changed and the fears over EM reserve drawdown will shortly re-emerge, once the punditry reads between the latest Chinese money creation and capital outflow lines.
The second, and far greater problem, facing the world is precisely what the Fed and its central bank peers have been fighting all along: too much global debt accumulating an ever faster pace, while global growth is stagnant and in fact declining.
…click on the above link to read the rest of the article…
“We Should Have Known Something Was Wrong”
“We Should Have Known Something Was Wrong”
Remember when stuff such as the following was written exclusively on “conspiracy” tin-foil blogs by deranged lunatics who could not appreciate the brilliance of the neo-Keynesian system and central-planning by academics, in all its glory? Good times.
Here is Bank of America’s Athanasios Vamvakidis channeling Tyler Durden circa 2009
The real cost of QE
QE was not a free lunch after all
If only it was that easy to print our way out of a global crisis. Eight years after the crisis, we are still debating about whether the recovery has gained enough of a momentum to allow exit from crisis-driven policies and start hiking rates from zero. The world economy has actually lost momentum this year (Chart 1), deflation risks have increased (Chart 2), and EM indicators and overall market volatility have reached crisis levels (see Chart 3). All this is despite unprecedented expansion of central bank balance sheets (Chart 4). Things may have been worse otherwise, but in hindsight we believe relying too much on unconventional monetary policies was not a free lunch after all.
We should have known something was wrong
The Fed “taper tantrum” could have been the first warning that QE had gone too far. The Fed’s announcement in June 2013 that they would consider tapering QE, contingent upon continued positive data, triggered a sharp market sell-off, particularly in EM. The aggressive search for yield, which intensified after the Fed announced QE3—or QE infinity as markets called it—came to a sudden stop. QE was not for infinity after all. The Fed tried to reassure markets that QE tapering was still policy easing and that its end would not imply rate hikes immediately, but the markets apparently thought otherwise. A key takeaway was not that QE had already gone too far, but that announcing its tapering may have been a mistake. The Fed waited until December to start tapering, although the market had already priced its beginning in September.
…click on the above link to read the rest of the article…
Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can’t Pay The Interest On Their Debt
Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can’t Pay The Interest On Their Debt
Earlier today, Macquarie released a must-read report titled “Further deterioration in China’s corporate debt coverage”, in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with “uncovered debt”, or those which can’t even cover a full year of interest expense with profit.
The report’s centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.
As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the “percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample.”
To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in “uncovered debt” companies) of cash flows, was generally known.
What wasn’t known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector.
We now know, and the answer is truly terrifying.
Macquarie lays it out in just three charts.
First, it shows the “debt-coverage” curve for commodity companies as of 2007. One will note that not only is there virtually no commodity sector debt to discuss, at not even CNY1 trillion in debt, but virtually every company could comfortably cover their interest expense with existing cash flow: only 4 companies – all in the cement sector – had “uncovered debt” 8 years ago.
…click on the above link to read the rest of the article…
